IAS 2

International Accounting Standard 2: Inventories is an international financial reporting standard issued by the International Accounting Standards Board that governs the valuation and presentation of inventories.

Overview and Definitions

IAS 2 defines inventories as assets held for sale in the ordinary course of business, in the process of production for such sale, or in the form of materials or supplies to be consumed in the production process or in the rendering of services.
The fundamental principle of IAS 2 is that inventories must be measured at the lower of cost and net realisable value. Cost comprises all costs of purchase, costs of conversion, and other costs incurred in bringing the inventories to their present location and condition.

Conversion Costs and Overheads

Costs of conversion include costs directly related to the units of production and a systematic allocation of fixed and variable production overheads.Variable production overheads: Those indirect costs of production that vary directly, or nearly directly, with the volume of production.Fixed production overheads: Those indirect costs of production that remain relatively constant regardless of the volume of production.
The allocation of fixed production overheads to the costs of conversion is based on the normal capacity of the production facilities.

Booking Examples for IAS 2

1. Initial Recognition and Completion

Scenario: An entity purchases raw materials for $10,000. It incurs $2,000 in direct labour and $1,000 in production overheads to manufacture finished goods.

Event	Debit	Credit	Amount	Rationale
Purchase of materials	Raw Materials	Cash / Accounts Payable	$10,000	Recognition at purchase price.
Conversion costs	Work in Progress	Cash / Accrued Wages	$3,000	Inclusion of labour and allocated overheads.
Completion of goods	Finished Goods	Raw Materials / WIP	$13,000	Transfer of all capitalized costs to final stock.
Balance Dec 31		Finished Goods	$13,000	Total carrying amount before NRV assessment.

2. Write-down to Net Realisable Value (NRV)

Scenario: At year-end, the finished goods have a market value of $12,500. Estimated costs to complete the sale are $1,000.NRV Calculation: $12,500 - $1,000 = $11,500.Write-down Amount: $13,000 - $11,500 = $1,500.

Event	Debit	Credit	Amount	Rationale
Recognize loss	Cost of Sales / Inventory Loss	Finished Goods	$1,500	Write-down to lower of cost or NRV.
Final Balance		Finished Goods	$11,500	Adjusted value reported on the Balance Sheet.

Disclosure Requirements

An entity must disclose specific information to allow users of financial statements to understand the valuation and impact of inventories. According to IAS 2.36, the following disclosures are required:

Paragraph	Category	Disclosure Requirement	Description / Examples
IAS 2.36	Accounting Policies	Cost Formulas adopted	Disclose whether the group uses FIFO or Weighted Average Cost..
IAS 2.36	Carrying Amounts	Total Carrying Amount	The total value of inventories as reported on the Consolidated Statement of Financial Position.
IAS 2.36	Carrying Amounts	Classification	Breakdown of inventories appropriate to the entity, typically: Raw Materials, Work in Progress, and Finished Goods.
IAS 2.36	Carrying Amounts	Fair Value less Costs to Sell	The carrying amount of inventories carried at fair value less costs to sell.
IAS 2.36	Income Statement Impact	Expense Recognition	The amount of inventories recognized as an expense during the period.
IAS 2.36	Income Statement Impact	Write-downs	The amount of any write-down of inventories to Net Realizable Value recognized as an expense in the period.
IAS 2.36	Income Statement Impact	Reversals of Write-downs	The amount of any reversal of a previous write-down that is recognized as a reduction in the inventory expense.
IAS 2.36	Income Statement Impact	Circumstances for Reversals	A description of the events or circumstances that led to the reversal of a write-down.
IAS 2.36	Encumbrances	Pledged as Security	The carrying amount of inventories pledged as security for liabilities.